Saturday, March 29, 2008

In the past two weeks, the Federal Reserve, long the guardian of the nation's banks, has redefined its role to also become protector and overseer of Wall Street.

With its March 14 decision to make a special loan to Bear Stearns and a decision two days later to become an emergency lender to all of the major investment firms, the central bank abandoned 75 years of precedent under which it offered direct backing only to traditional banks.

Inside the Fed and out, there is a realization that those moves amounted to crossing the Rubicon, setting the stage for deeper involvement in the little-regulated markets for capital that have come to dominate the financial world.

Leaders of the central bank had no master plan when they took those actions, no long-term strategy for taking on a more assertive role regulating Wall Street. They were focused on the immediate crisis in world financial markets. But they now recognize that a broader role may be the result of the unprecedented intervention and are being forced to consider whether it makes sense to expand the scope of their formal powers over the investment industry.

"This will redefine the Fed's role," said Charles Geisst, a Manhattan College finance professor who wrote a history of Wall Street. "We have to realize that central banking now takes into its orbit everything in the financial system in one way or another. Whether we like it or not, they've recreated the financial universe."

The Fed has made a special lending facility -- essentially a bottomless pit of cash -- available to large investment banks for at least the next six months. Even if that program is allowed to expire this fall, the Fed's actions will have lasting impact, economists and Wall Street veterans said.

The story is more floating of an idea than anything else. But the mere fact that our leaders are considering expanding the role of the Fed should raise alarms and red flags to everyone. The response from everyone to this idea SHOULD be a resounding Ari Gold "Fuck You!" along with calls for Bernanke resign and the Fed to be abolished. That is, unless everyone likes inflation at 20 percent, and government intruding into every aspect of your life, and us living in a banana republic like Zimbabwe.

Looking at the situation, I'm reminded of this quote by one of our founding fathers:

"If the American people ever allow private banks to control issue of their currency, first by inflation, then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."